Bookkeeping Made Simple 41

Question 1

1. p 96. INTEREST. What is INTEREST?

Answer 1

INTEREST is RENT charged for the use of money.

Question 2

2. Interest your business pays to its creditors, including banks, is:

Answer 2

INTEREST EXPENSE.

Question 3

3. How are payments of interest recorded?

Answer 3

Interest Exp….100
Cash………….100

Question 4

4. Interest received from customers or vendors is:

Answer 4

INTEREST INCOME, and it is entered as:

Cash………320
Interest Inc….320

Question 5

5. What are the THREE ELEMENTS used in figuring the amount of interest on a borrowed sum of money?

Answer 5

PRINCIPAL
INTEREST RATE
TIME

Question 6

6. INTEREST RATES are a YEARLY RATES, so they must be;

Answer 6

ADJUSTED to the actual length of the loan.

Question 7

7. What is the formula for adjusting the INTEREST RATE to the length of the loan?

Answer 7

I = PRT, where:

I = INT
P = PRINCIPAL
R = INTEREST RATE
T = TIME

Int = Principal x Rate x Time
Int = (prin/1) x (rate/100) x (time in days/360)

Question 8

8. What is the INTEREST on $1k (Principal) borrowed at 12% (Interest) for 60 days (Time)?

Answer 8

I = (1000/1) x (12/100) x (60/360)
= 1000 x 0.12 x 0.1667
= $20.00